London Goes Radical to Take On New York and Amsterdam

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A long awaited review into how the U.K. can reinvigorate its capital markets has not held back. It goes further than addressing inconsistencies in the current regime for initial public offerings and special purpose acquisition companies. The smorgasbord of policy prescriptions make sense, but the vision of a generally more flexible and amenable regulator warrants caution.

First, consider the necessary steps needed to make the City of London competitive with New York and Amsterdam. Former EU commissioner Jonathan Hill’s report sensibly backs allowing dual-class shares with a five-year limit and other constraints. Founder-managers of companies would finally be able to maintain control if they list on London’s “premium” market segment. It’s a pragmatic compromise on the U.K.’s one-share one-vote doctrine that will give investors more choice at an acceptable cost in terms of temporarily limited outside influence.

Likewise, relaxing the requirement for a listed company’s free float to 15% reflects the reality that this measure is just one of several that determine how freely shares trade.

As for London’s SPAC regime, Hill’s report proposes giving investors more powers. A key idea is to remove the requirement for the SPAC to suspend its shares when it identifies a target unless it can publish a prospectus. That gives investors the comfort of knowing a stock will continue to trade throughout the process. He also suggests SPAC investors should get a vote on the proposed transaction, a power they don’t have now.

The more radical proposals are around information flow. Hill advocates reviewing the legal framework for directors’ liability so that managers can make forward-looking statements more broadly — in prospectuses for initial public offerings, in SPAC deals and once listed. This would arguably be an improvement on what happens now: Companies effectively make forecasts in code to investment analysts via lawyers and the research is not made available to the whole market.

True, there is the risk that companies lie about their prospects as they are going public. But that danger is already present in the current cloak-and-dagger IPO process, which benefits the lawyers and analysts who function as gatekeepers to the guidance and the big investors who receive the research.

There’s a chance retail investors may be too trusting of what the company says, especially in today’s social media and meme-stock driven environment. But the broader benefits of making company projections visible for all investors, not just the powerful ones, are worth it as long as there are sanctions on making outright fraudulent or misleading statements.

This would have been enough. Yet Hill is also proposing watering down the rules around prospectuses — both when they’re required and what they must contain. A lot of what goes in them may be boilerplate that doesn’t necessarily help investors take a decision. But a recommendation to relax requirements for the historic trading record of companies that have done a lot of recent acquisitions goes too far.

Likewise, Hill suggests that the Financial Conduct Authority’s remit should be revised to take into consideration the attractiveness of the City of London as a place to do business — in other words, asking whether regulation is harming the market. That would be a shift back to the pre-crisis era. It potentially conflicts with the supervisor’s role as watchdog. Far better for lawmakers to ask the question and leave the regulator focused on enforcement.

The proposals land amid worries about bubbles everywhere — bonds, equities, SPACs. That is an awkward backdrop for reforms that aim to encourage greater retail participation in the markets. But current regulation creates a lot of work for intermediaries without certain benefit, favors powerful investors more than small ones, impedes broad scrutiny of new issues and limits investor choice. That status quo can’t continue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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